Munis take breather ahead of potential government shutdown

Munis were little changed Monday as attention turned to the growing possibility of a federal government shutdown. U.S. Treasury yields fell and equities ended up.

The two-year muni-UST ratio Monday was at 63%, the five-year at 61%, the 10-year at 71% and the 30-year at 91%, according to Municipal Market Data’s 3 p.m. ET read. ICE Data Services had the two-year at 62%, the five-year at 61%, the 10-year at 70% and the 30-year at 90% at a 4 p.m. read.

The two chambers of Congress are unlikely to come to a compromise by Tuesday’s midnight deadline for a “continuing resolution (CR) to extend the 2025 fiscal-year budget,” said Jennifer Timmerman, an investment strategy analyst at Wells Fargo Investment Institute.

A shutdown seems likely to begin on Wednesday, Oct. 1, affecting “nonessential functions of the government’s discretionary spending,” she said.

The shutdown is likely to have only a “small and transitory economic impact,” but could lead to some financial market volatility, especially if “delays in government economic reports obscure the path of Federal Reserve rate cuts,” Timmerman said.

“Historically, equity markets have focused on long-term earnings prospects and have demonstrated resiliency during past shutdown episodes — particularly during brief government closures,” she said.

Additionally, previous instances of uncertainty, “due to disruption of data releases or uncertainty over policy determined by a data-dependent Fed, have temporarily triggered a brief flight-to-quality, benefiting perceived safe-haven assets like gold along with U.S. Treasury securities and other high-quality debt,” Timmerman said.

The muni market may be shaken by a government shutdown, driving short-term volatility and wider spreads, said James Pruskowski, a public finance strategist.

“Smaller, grant-dependent issuers will feel the pinch as federal funding delays push borrowing costs higher,” whereas “Strong, diversified municipalities remain insulated, but valuations have tightened too fast and optimism is running ahead of reality,” he said.

Trading and new issuance may slow as agencies are sidelined and a short-term risk premium materializes, Pruskowski said.

Elsewhere, “after starting the week at aggressive valuations relative to taxables, particularly in the front end of the curve, it was no surprise that the muni market struggled to sustain its outperformance,” Birch Creek strategists said.

MMD’s scale saw yields cut as much as 13 basis points up front, while the 30-year “kept pace” with USTs after rising two basis points, they said.

The front end saw the largest cuts “since hiring has slowed on the jobs front and GDP growing to 3.8% during Q2,” pushed UST yields higher and munis followed suit, said Jason Wong, vice president of municipals at AmeriVet Securities.

A “deluge” of bids wanteds and a particularly hefty new issue calendar of $14 billion, “heavily concentrated in shorter tenors,” made the front end of the curve feel “heavy,” according to Birch Creek strategists, noting, “sellers and issuers alike looked to take advantage of tax-exempt to taxable ratios in the mid 50% range.”

By Thursday, Birch Creek strategists noted that “dealers reported they could buy AAA paper in the high teens to mid +20s spreads [five years] and in, while odd lots were trading off 20-30bps.”

Additionally, “several new issues struggled to clear and dealers were left with balances on both negotiated and competitive deals,” they said.

Issuance is lighter this week at an estimated $6.8 billion and will offer “some relief on the supply side, but ratios still hovering below 60% in the front end leave little to be desired,” Birch Creek strategists said.

AAA scales
MMD’s scale was unchanged: 2.38% in 2026 and 2.28% in 2027. The five-year was at 2.30%, the 10-year was at 2.92% and the 30-year was at 4.26% at 3 p.m.

The ICE AAA yield curve was bumped up two basis points out long: 2.32% (+2) in 2026 and 2.26% (+1) in 2027. The five-year was at 2.30% (unch), the 10-year was at 2.94% (-2) and the 30-year was at 4.25% (-2) at 4 p.m.

The S&P Global Market Intelligence municipal curve saw cuts on the front end: The one-year was at 2.36% (+2) in 2025 and 2.26% (+2) in 2026. The five-year was at 2.30% (unch), the 10-year was at 2.93% (unch) and the 30-year yield was at 4.27% (unch) at 3 p.m.

Bloomberg BVAL was unchanged: 2.27% in 2025 and 2.24% in 2026. The five-year at 2.28%, the 10-year at 2.91% and the 30-year at 4.25% at 4 p.m.

Treasuries saw gains.

The two-year UST was yielding 3.634% (-1), the three-year was at 3.634% (-2), the five-year at 3.742% (-2), the 10-year at 4.145% (-3), the 20-year at 4.691% (-4) and the 30-year at 4.711% (-4) at the close.

Primary to come
The Los Angeles Department of Water and Power (Aa2//AA-/AA/) is set to price Wednesday $812.69 million of power system revenue bonds, Series 2025C. Wells Fargo.

The Lower Alabama Gas District (A1///) is set to price $678.14 million of gas project revenue refunding bonds, Series 2025A. Goldman Sachs.

The Allegheny County Sanitary Authority (Aa3/AA-//) is set to price Tuesday $421.61 million of sewer revenue bonds. J.P. Morgan.

Norfolk, Virginia, (/AAA/AA+/) is set to price Tuesday $261.93 million of GO capital improvement and refunding bonds, consisting of $247.145 million of tax-exempts and $14.785 million of taxables. BofA Securities.

The Park Creek Metropolitan District (/AA//) is set to price Tuesday $244.475 million of senior limited property tax supported revenue refunding and improvement bonds. RBC Capital Markets.

Memphis, Tennessee, (Aa2//AA/) is set to price Tuesday $233.165 million of Memphis Light Gas and Water Division electric system revenue bonds. Raymond James.

The New Mexico Finance Authority (Aa1/AAA//) is set to price Tuesday $216.68 million of subordinate lien public project revolving fund revenue bonds, Series 2025C. BofA Securities.

The Cherry Creek School District No. 5, Colorado, (Aa1/AA//) is set to price Wednesday $193.09 million of GO refunding bonds. RBC Capital Markets.

The Birmingham Special Care Facilities Financing Authority, Alabama, (/AA-/AA-/) is set to price Wednesday $187.87 million of health care facilities revenue bonds, Series 2025A Children’s Hospital. J.P. Morgan.

The North East Texas Regional Mobility Authority is set to price Wednesday $181.52 million of revenue and refunding bonds, consisting of $133.935 million of senior lien bonds, Series 2025 (Baa1/A//), and $47.585 million of subordinate lien bonds, Series 2025B (Baa2/A-//). BofA Securities.

The Riverside County Public Finance Authority (/AA//) is set to price Wednesday $175.75 million of tax allocation refunding revenue bonds, Series 2025A. Loop Capital Markets.

The Indiana Housing and Community Development Authority (Aaa///) is set to price Tuesday $175.53 million of social single-family mortgage revenue bonds, consisting of $102.78 million of non-AMT Series 2025C-1 bonds, $57.75 million of taxable Series 2025C-2 bonds and $15 million of taxable pass-through Series 2025C-3 bonds. RBC Capital Markets.

Cook County, Illinois, (/AA-/AA/AAA) is set to price Wednesday $149.41 million of sales tax revenue bonds. Ramirez.

Riverside County is set to price Thursday $148.1 million of Teeter Plan obligation notes, Series 2025A. Loop Capital Markets.

New Haven, Connecticut, (Baa1/A-/A-/) is set to price Tuesday $118.72 million of refunding GOs. Cabrera Capital Markets.

The Maine State Housing Authority (Aa1/AA+//) is set to price Tuesday $117.825 million of social mortgage purchase bonds, Series 2025D. BofA Securities.

The Wisconsin Housing and Economic Development Authority (Aa3/AA+//) is set to price $105.34 million of non-AMT housing revenue bonds, consisting of $39.92 million of Series 2025A bonds and $65.42 million of Series 2025B bonds. Wells Fargo.

Competitive
The Arlington Economic Development Corp. (Aa1/AA//) is set to sell $70.86 million of taxable sales tax revenue bonds at 11 a.m. Eastern Tuesday.